Zintix (Australia) Pty Ltd v Employsure Pty Ltd

HIS HONOUR: On 25 March 2014, Zintix (Australia) Pty Ltd trading as Italian Foods Aust (“the plaintiff”), entered into a contract with Employsure Pty Ltd trading as Employsure (“the defendant”). The contract was in electronic form (executed on an iPad) and titled “Contract for Services” (“the contract”). The contract had dual logos in its heading, one of which was that of QBE Insurance (Australia) Ltd (“QBE”), a large insurer, and the other that of the defendant. The defendant was a company that operated a business of providing industrial relations or employment relations and work health and safety related services.

The contract was divided into four major sections, each headed with the following titles:

The first section recorded only basic information regarding the client and is uneventful for the purposes of these proceedings.

The second section provided, by a means of hollow bullet points, a series of services offered by the defendant which the plaintiff may accept (in which case an entry was made within the bullet point to indicate acceptance). The section provided for new and renewal services. It would appear that the first three services offered were standard to the contract whereas the fourth and fifth services were optional.

The first three services (numbered in that fashion), offered in the contract (which were nominated by the plaintiff) were as follows:

The fourth option was also selected by the plaintiff and was in the following terms:

The plaintiff correctly described this as a “bolt-on” option for Fair work cover provided by QBE. In this case, although the insurance option was marked, the payment schedule showed no premium was included in the total fee for the services. No policy was pleaded by the defendant as to the formation of the contract in that respect. Accordingly, it is the first three services that were the consideration offered by the defendant.

The next section of the contract was described as the “Payment Schedule”. By that section of the contract, reference was made to the number of employees of the plaintiff, the total wages bill of the plaintiff for the last financial year and under a subheading “Contract Period and Installment [sic] Details” terms for the contract. This subheading had a series of subsidiary headings which, together with the entry appearing in the contract, were as follows:

Given the significance of this section of the contract, I extract below (albeit with a reduced quality through copying) the terms of that schedule as it actually appears in the contract:

The final section of the contract was entitled “Further Terms”. It sets out the terms of the contract in six clauses (a)-(f). The provisions of clauses (a)-(c) feature in these proceedings. Those provisions are set out below:

The plaintiff used services provided for within the contract and made a number of monthly instalment payments pursuant to the contract. It then ceased making those payments in November 2014 (save for two payments in April and May 2015). The defendant contended, but I will later reject, that services were provided to the plaintiff after that time.

By an amended statement of claim filed on 21 October 2015, the defendant commenced proceedings in the Local Court and sought, inter alia, damages. It pleaded that the plaintiff entered into a contract with the defendant whereby the plaintiff agreed to pay the defendant a specified rate for the supply of employment relations and work health and safety related services. It pleaded that the defendant agreed to pay the sum of $18,000 exclusive of GST in exchange for the services and that the contract fee was payable in “60 instalments” (each instalment in the sum of $300 plus GST and due and payable monthly).

The defendant further pleaded that between 25 March and 4 August 2014 the defendant provided the services to the plaintiff and that the plaintiff made payments between 1 April 2014 and 1 May 2015. The defendant pleaded a breach of contract in that the plaintiff failed to pay the instalment amounts due and claimed that “as at 1 June 2015 the amount of $18,463.20 was due and payable by the [plaintiff] pursuant to the contract”. The particular relied upon in that respect was cl (c) of the fourth section of the contract entitled “Further Terms”. (I note that the defendant contended that, in the proceedings below, it had opened upon the basis that the defendant sued the plaintiff for the balance of monies owing under the contract and made a claim for a debt owing. This submission is commensurate with the submission advanced on the appeal but the same may not be said of the pleadings).

The matter was heard by Local Court Magistrate W G Pierce who delivered his reasons for decision in his primary judgment on 31 March 2017 and further reasons for decision with respect to the incorporation of GST, costs and interest on 31 May 2017. In the latter judgment, his Honour ordered the plaintiff to pay the defendant the sum of $16,800 plus interest (together with an order for costs).

There were a number of issues ventilated in the primary proceedings before his Honour but the central issue, and the one that will occupy the determination of this Court, was whether the provisions of cl (c) of the “Further Terms” section of the contract gave rise to a penalty and was ultimately unenforceable. There was also an issue as to whether the plaintiff’s claim was for a debt or liquidated damages; which accounted for a significant portion of the Court’s reasoning below.

Whilst Pierce LCM considered the operation of clauses (a)-(c) of the “Further Terms” in the context of the entire contract, he ultimately concluded that cl (c) of the “Further Terms” was an acceleration clause because the contract gave rise to an immediate debt of $18,000, the payment of which was postponed pursuant to an arrangement for 60 instalments. He found that the reality was that “the primary obligation” which fell on the plaintiff was to “pay the total amount, and to meet the full 60 instalments as they fell due. To require the whole to be met on the failure of one or more payments is not to impose a separate collateral or accessory stipulation, but to simply require the [plaintiff] to meet the primary stipulation itself”. Clause (c), his Honour found, was “not a penalty because it is an acceleration clause, and because there is nothing to indicate it was intended as a deterrent or a punishment”.

Pierce LCM determined that the defendant was entitled to “liquidated damages” and an amount that would compensate it for the plaintiff’s “breach”. That was found to be the remaining value of the contract which his Honour estimated to be (having regard to a concession that GST was not payable) $16,800 plus interest.

By a summons filed on 28 June 2017 (“the summons”), the plaintiff sought leave to appeal and, if granted, appeal from the whole of the decision below. The plaintiff sought that the judgment below be set aside and that, in particular, the orders made 31 May 2017 be set aside with a verdict and judgment in favour of the plaintiff with costs.

It is unnecessary to set out the particular grounds of the appeal as, to the extent applicable, they will be traversed in the consideration of the issue raised for adjudication on the appeal, namely whether upon the proper construction of the contract, cl (c) gave rise to a penalty or not. The counterpoint question raised by the defendant was whether the clause was an acceleration clause (hereinafter, collectively, referred to as “the issue”). The parties agreed that it was unnecessary to consider Pierce LCM’s conclusions which travelled beyond those matters into the territory of debt and liquidated damages. (It may be noted that the plaintiff did not press ground 4 concerning a finding by the Court below that oral notice of the terms of the contract was given by the defendant and ground 6 concerning the amount of ordinary and indemnity costs ordered by the Court below).

As mentioned, the plaintiff sought leave to appeal. However, in the plaintiff’s written submissions this order was sought only in the alternative pursuant to s 40 of the Local Court Act 2007 (NSW).

The plaintiff correctly submitted that the construction of a contract which lay at the centre of the issue raised on the appeal was a question of law (see Francis v Lyon (1907) 4 CLR 1023 at 1040 and Cripps v G & M Dawson Pty Ltd [2006] NSWCA 81 (“Cripps”) at [46] per Santow JA with whom Mason P and Brownie AJA agreed). As such s 39 of the Local Court Act gave the plaintiff a right of appeal. (The defendant accepted this was the case although suggested that the appeal may constitute a mixed question of fact and law).

Pierce LCM characterised the construction of a contract and, in particular, whether the clause was a penalty as a question of fact. Nothing turns upon this finding but I note that it was erroneous: see Cripps at [46] and J W Carter, LexisNexis, Carter on Contract (at September 2017) at [12-010].

Prior to addressing the submissions of the parties as to the issue, I will turn to the decision below. However, it should also be observed, at this juncture, that the judgment of the High Court in O’Dea v Allstates Leasing System (WA) Pty Ltd (1983) 152 CLR 359 (“O’Dea”) featured predominantly in the respective contentions of the parties (I will return to a discussion of that authority below at [41]-[86] of this judgment).

In reliance upon the judgment of the High Court in Andrews v Australia and New Zealand Banking Group Ltd (2012) 247 CLR 205; [2012] HCA 30 (“Andrews”), Pierce LCM stated that, generally, a stipulation is a penalty if, collateral to the failure of a primary stipulation, it imposed an additional detriment as a “collateral or accessory stipulation”. His Honour found that it is a primary stipulation if the whole debt was due and payable at the time of contracting with the payment postponed. The provisions of cll (a)-(c) of the section entitled “Further Terms” in the contract only imposed a primary stipulation and not an “additional detriment as a collateral”.

The Court below recognised that a requirement to pay all 60 monthly payments on breach of an obligation to pay just one would raise “a strong suspicion that it was grossly disproportionate” and, therefore, raised a question as to whether the clause was “nothing more than a deterrent against breach”. However, the obligation to make a payment of the whole in the present case, it was found, was the operation of an acceleration clause.

His Honour recognised that because of the nature of the contract examined in O’Dea, “it was not easy to distinguish [that judgment] from the present matter”.

The Court below considered the judgment of the then Chief Justice in O’Dea (at [5] and [6]) and, in the course of doing so, identified what became a principal basis for the Magistrate distinguishing that decision. That passage from the judgment below was as follows (at 9):

As I will discuss momentarily, I do not consider that this passage from the judgment below properly reflects the judgment of Gibbs CJ in O’Dea. Nor does it properly understand the judgment of Brennan J in the same decision.

Pierce LCM then turned to the question of the significance of a breach of contract in determining whether a provision was a penalty clause. His Honour observed that Gibbs CJ’s judgment at [6] might give the impression that, in a case of breach of contract, “the provision in question will always be a penalty unless it is a genuine pre-estimate of loss”. However, his Honour then concluded that Gibbs CJ in AMEV-UDC Finance Ltd v Austin (1986) 162 CLR 170 (“AMEV-UDC”) at [4] “had made it clear that, in the case of breach, a provision of a contract will be a penalty only if the party enforcing the clause itself terminates the contract because of the other party’s breach”. Pierce LCM continued (at 9):

It is not clear from the judgment below how the judgment of Gibbs CJ in AMEV-UDC may support such a conclusion. In that matter, a hirer of equipment, in breach of its contract, but without repudiating it, failed to pay instalments of hire when due. The owner exercised a contractual right to determine the hiring and claimed under the terms of the contract a right to recover not merely unpaid instalments with interest but the whole unpaid balance of the total hiring charges and the residual effects specified under the contract less the proceeds of sale of equipment. In that context, Gibbs CJ held (at 174):

It may also be noted that a distinction of the kind referred to by Pierce LCM was discussed by Gibbs CJ in O’Dea but only in relation to a contract of a different character to the one here under consideration, namely, in O’Dea, a particular class of contract where a sum became payable on a certain event vis-à-vis a hire purchase contract (see at [51] of this judgment).

It was in this light that Pierce LCM found that, upon reading of the contract as a whole, “it was apparent that there was an agreement to pay a total sum of $18,000.00, with payment merely postponed pursuant to an arrangement for 60 monthly instalments, which militates in favour of viewing the provisions as an acceleration clause” (at 9-10).

His Honour then turned to the distinction between the primary and collateral obligations or stipulations and made the following finding:

Further, his Honour held (at 11):

Pierce LCM found that “in a quite real sense there is a debt owed, but [the defendant] does not sue for debt”. Later, his Honour opined that, although the claim in the matter before him “speaks in a general way of debt” it was not a claim for debt but rather one for liquidated damages.

As the plaintiff correctly submitted, the Magistrate must have appreciated the tension between concluding that the obligation to pay $18,000 was a debt accrued upon the entering into the contract for the purposes of deciding whether the clause was a penalty or an acceleration clause but then rejecting the argument that the claim was one founded in debt and not liquidated damages. This resulted in a form of reconciliation by the Court below which both parties eschewed in their arguments on this appeal (at 15-16):

That reasoning lead to the well-founded critique by the plaintiff of that aspect of the first instance judgment which is reflected in my reasoning in the next paragraph of the judgment. The plaintiff’s contention is also relevant to the ultimate conclusion reached in this judgment that the Magistrate erred in finding that cl (c) was an acceleration rather than a penalty clause.

The difficulties with the reasoning of the Court below as extracted in the preceding paragraphs are as follows:

In summary, the submissions for the plaintiff were as follows:

In summary, the defendant submitted as follows:

As earlier mentioned, O’Dea featured predominantly in the respective contentions of the parties. The judgment in O’Dea concerned an appeal from the Supreme Court of Western Australia. Mr and Mrs O’Dea and a Mr and Mrs Granich traded as cartage contractors. They entered into an agreement with the first respondent to the proceedings for the hire of a truck for the period of 36 weeks resulting in the entire rental being about $39,000.

Clause 1(a) of the agreement stated that the lessor, the first respondent, leased to the lessee and the lessee took on the lease of the truck as follows:

By cl 6(a) of the agreement, the lessee agreed duly and punctually to pay the lessor instalments of rent on the days set forth in cl 1(a) (at 364).

Clause 12 of the agreement also required attention in the context of the contentions advanced in these proceedings (and the identification of the ratio in O’Dea). It was in the following terms:

Clause 31 of the agreement required the lessor, on receipt of the vehicle on repossession, to sell the vehicle for the best price it could reasonably obtain and the lessee agreed to pay, by way of indemnity, for the capital loss of the amount by which the appraisal value stated in the schedule to the agreement exceeded the disposal price after allowing for costs and expenses of disposal. The appraisal value was stated at about $13,300.

The lessee took possession of the vehicle and paid rent totalling about $8,000 representing the first seven monthly instalments and part of the eighth instalment but paid no rent thereafter. The truck was repossessed and sold for $20,000. To take possession, the lessor had to pay a sum to a company which had a lien on the vehicle for repairs. The lessor sought to recover a sum representing the difference between the entire rent and the instalments paid plus interest and the amount paid to discharge the lien debt. The Court held that the lessor was not entitled to recover the balance of the entire rent.

Gibbs CJ, Wilson and Deane JJ came to that conclusion because the claim constituted a penalty; since it arose upon the breach by the lessee of the terms of the lease and the amount the lessor was entitled to receive was excessive in comparison with the greatest loss the lessor could possibly suffer. I will address each judgment in turn, as well as that of Brennan J, commencing with the then Chief Justice.

His Honour observed that the lessee claimed that the terms of the agreement were unenforceable as a penalty. The first respondent contended that the rules which distinguished between a penalty and liquidated damages were inapplicable as the first respondent was suing for the consideration payable under a contract and was not seeking to recover a sum in the event of a breach by the lessees of their contractual obligation. As a result, “the question whether the amount payable was a genuine pre-estimate of damage did not arise” (at 366).

Gibbs CJ considered that the authorities relied upon by the first respondent to establish that no question of a penalty arose fell into two classes. The first such class was described in the following terms (at 366-367):

The defendant correctly described this class as the “true acceleration” class deriving in its earliest form from the Protector Loan Co v Grice (1880) 5 QBD 529.

The second class to which Gibbs CJ referred concerned circumstances where the sum stipulated became payable on a certain event. His Honour also considered in those circumstances whether the requirement arose in consequence of a breach of contract. His Honour’s judgment in that respect was as follows (at 367):

After turning to some general principles, to which I will return, his Honour considered the case before him, the discussion of which commenced as follows (at 368):

It is evident from that passage of the judgment that his Honour was not concerned with the second class of cases to which he referred but one concerning a breach of the lease. Nor was his Honour dealing with the first class of cases providing for the acceleration of a presently existing debt (see at 368).

The conclusion his Honour arrived at came from a consideration of the operation of cll 1(a), 6(a) and 12 of the agreement when read together. That component of his Honour’s judgment is significant in the present proceedings and will be set out in full below (at 368-369):

This passage from his Honour’s judgment represents a plain difficulty for the defendant’s case.

Clause 1(a) of the agreement considered in O’Dea provided that the entire rental was due and payable by the lessee upon the signing of the agreement, albeit that payment was deferred upon the lessee making punctual payment of instalments on account of the entire rent. Gibbs CJ concluded that, read in isolation, that clause may create a present debt for the entire rental, even though the lessee was granted an indulgence for paying the sum by instalments. However, when cll 1(a), 6(a) and 12 of the agreement were considered together, no presently existing obligation to pay the entire rental arose in that case. The obligation was to pay the specified instalments and, in the event of default, the whole became payable. Hence, the entire rental only became payable in the events prescribed in cl 12, that is, the obligation to pay the entire rent arose only by reason of breach, thereby making the amount which the contract made payable in that event either a penalty or liquidated damages.

In the contract here under consideration, unlike the terms of cl 1(a) of the agreement in O’Dea, there is no express wording that the entire sum entered against the words “Total Fee” in the “Payment Schedule” section of the contract is due and payable upon the execution of the contract, save that an indulgence would be given to make instalments on certain basis. I will ultimately find that, upon proper construction, the contract does not give rise to an immediate debt upon execution which was payable in the future.

But even if the provisions of the contract other than cl (c) of the “Further Terms” section were to be construed, having regard to the circumstances addressed by the contract, as giving rise to a present debt for the entire fee upon the execution of the contract (contrary to my later findings), in my view, cl (c) (described in argument as the “third Further Term”) operated indistinguishably from the counterpart provision of cl 12 of the agreement in O’Dea (albeit in a context where the terms of cl 1(a) were arguably much stronger in providing for an immediate debt than any provision of the contract) because that provision provided that any obligation to pay the entire fee only arose by reason of breach. To apply the reasoning of the Chief Justice, the obligation was to pay instalments and, if there was a default (the language in cl (c) is “failure”) the whole became payable.

The substance of the contract is to provide for a significant sum of money to be paid upon breach which, akin to the circumstances in O’Dea, was unrelated to compensation for loss which the defendant may suffer on the premature termination of the contract as it is due irrespective of nature of the breach or when it occurred (and other factors discussed later in this judgment in ruling the clause is in the nature of a penalty provision). The fact that payments may be available on a monthly, quarterly or annual basis does not affect the operation of those principles but raises other questions discussed below.

As the plaintiff correctly contended, there is a two-fold question where a penalty provision arises for consideration namely, if the clause provides for a breach and a breach arises, is the clause simply a penalty or one in which there is a genuine pre-estimate of damages (as discussed in the aforementioned extracts from the judgment of Gibbs CJ). The defendant did rely upon later passages from the judgment of Gibbs CJ (see, for example, at 373, 374 and 375) but I agree with the plaintiff that the defendant’s contentions failed to apprehend this distinction in a case of a penalty. Thus, there appears the then Chief Justice’s judgment, immediately following the last extracted passage above the following (at 369):

His Honour explained that acceptance by counsel for the first respondent in O’Dea on two bases. The first was that the outstanding balance of the entire rental could not, in the circumstances, possibly represent a genuine pre-estimate of loss which would be caused to the first respondent by a breach of contract. Significantly, in terms of a further argument advanced by the defendant in this matter vis-à-vis a distinction drawn in relation to the capacity under the provision of cl 12 of the agreement in O’Dea to repossess the truck, the second basis was that the first respondent was, in the case of a breach, entitled to repossess and sell the vehicle but it was not bound to account to the lessee for any amount received on a re-sale, even if it exceeded (as it did) the appraisal value. In other words, that issue was relatively connected to the issue of a genuine pre-estimate of loss.

The defendant placed reliance upon the passage of the judgment of the then Chief Justice where his Honour observed that whether a contractual provision amounts to a penalty depends on all the surrounding circumstances existing at the time of the making of a contract as well as the terms of the contract itself and that “it is therefore not always possible to apply a decision given upon one contract to another case even though that case concerns a contract in identical terms” (at 373). His Honour was there dealing with the reliance placed in O’Dea upon Lamson Store Service Co Ltd v Russell Wilkins & Sons Ltd (1906) 4 CLR 672 (“Lamson Store”) (which was not followed by his Honour and two other judgments of the Court) but the principle is applicable in the present matter.

However, neither that passage nor a later passage (at 374) relied upon by the applicant (where the then Chief Justice referred to the first respondent being entitled to recover such unpaid instalments as were due before it took repossession of the vehicle and such damages as may be proved to have been occasioned by the breach) warrants a conclusion that the distinction sought to be drawn by the defendant vis-à-vis the capacity under cl 12 to repossess the truck (in addition to recovering the entire rental) between the judgment of the then Chief Justice in O’Dea and the present matter is available for two reasons.

First, as the then Chief Justice observed, The Procter Loan Co v Grice only applied where there was a present debt, that is “a debt actually due before the breach which accelerated the payment” (at 374). He found that the provisions of the contract which required payment of the entire rent upon breach amounted to a penalty and, therefore, the first respondent’s claim could not succeed. Those findings did not depend upon the provisions of cl 12 of the agreement considered in O’Dea providing that, as a consequence of a breach, the first respondent had available under the contract both the repossession of the vehicle as well as the recovery of the entire rental.

Secondly, for the reasons I have given, the consideration by his Honour of the repossession the truck did not influence his determination as to the nature of cl 12 of the agreement in O’Dea. Rather, it was a factor going to whether the sum payable under the contract was a penalty or liquidated damages. There was no dispute in O’Dea that, if an immediate debt was not found to exist, the sum payable under the agreement was a penalty because the sum did not represent a genuine pre-estimate of loss.

The repossession of the vehicle was relevant in that context – the Court having found that the contract did not provide for a present debt. For example, his Honour had regard to whether the first respondent in O’Dea became entitled under the contract to receive accelerated payments of the rental without any rebate and to receive back the vehicle sooner than would otherwise be the case without giving credit for its value and in circumstances where the amounts received by the first respondent were manifestly excessive in comparison to its greatest loss (at 369).

Next, I turn to the judgment of Wilson J.

The passage relied upon by the defendant, which appears in italics in the extract from Wilson J’s judgment below (at 382-383) does not, in my view, assist the defendant:

Reference should also be made to the passage of his Honour’s judgment following a finding that Lamson Store did govern the case:

His Honour there found that, if the first respondent had relied only upon cl 1(a) of the agreement, it may have been successful in a cause of action for the entire rental. In those circumstances “[t]he question of penalty or liquidated damages would not then arise” (at 382).

However, Wilson J’s reference to the repossession of the vehicle in this context was merely for the purposes of aligning the claim as one made under cl 12. As his Honour found, that clause did not purport to effect a withdrawal of the indulgence of deferred payment of rent which was the subject of the proviso in cl 1(a) of the agreement, and, in fact, made no reference to rent but made “[a]ll moneys due for the unexpired terms… immediately due and payable” (at 383). As defaults under the clause may arise from trivial or serious breaches without distinction in remedy and the clause may operate at any time during the currency of the lease with no provision for rebate, cl 12 could not represent a genuine pre-estimate of damage and was a penalty. None of those factors correspond to any penalty arising with respect to the repossession of the truck. Clause (c) is to a similar effect and the judgment of Wilson J in O’Dea provides guidance as to why it should be considered a penalty clause.

The defendant placed reliance upon the judgment of Deane J. His Honour described the nature of the contract as follows (at 395-396):

His Honour then turned to the effect of cl 12, adopting a similar analysis to Wilson J (at 396):

To the same effect, Deane J found (at 397):

The defendant referred to a passage at 398 of Deane J’s judgment. That passage is italicised below in the following (larger) extract from that part of his Honour’s judgment (at 398):

Deane J’s analysis is, in my view, ultimately of no different effect to that of Wilson J. His Honour rejected the contentions advanced by the first respondent that the sum payable was for the balance of the agreed hire term (the consideration for the hiring) and not the amount payable as a consequence of a breach. Once cl 12 of the agreement in O’Dea had been engaged because the first respondent had elected to terminate the hiring and retake possession of the vehicle, the first respondent’s rights against the lessee in respect of monies attributable to the unexpired term of the hiring which it had terminated were rights conferred by cl 12.

As his Honour found, it would be a misuse of language to describe the obligation under cl 12 to immediately pay the “moneys due for the unexpired term” as an obligation to pay rent. Rather it was an obligation to pay those moneys as a consequence of breach calculated and described by reference to, but “distinct and quite different in substance from the amounts which would be payable as rent if no default had occurred” (at 396). His Honour’s reliance upon the repossession of the vehicle was not instrumental in the rejection of the argument presented by counsel for the first respondent as to a present debt but rather crucial to a finding that cl 12 applied.

It is true that his Honour found that the moneys payable could not be for hire of the truck because the lessees had been deprived of possession and use of the vehicle but the centrality of his Honour’s reasoning was that the moneys became due and payable because of the breach and the first respondent’s election to repossess the truck under cl 12.

His Honour went on to consider the judgment in Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79 (“Dunlop Pneumatic Tyre Co”) to find the provisions of cl 12 imposed a penalty. His Honour found that there was nothing at all in the agreement to suggest the provisions represented a genuine or reasonable pre-estimate of damages which the first respondent would sustain in the event of a breach by the lessee. It was found that the provisions could result in an unreasonable windfall to the first respondent and an unconscionable burden on the lessees in the event of a breach of the most trivial condition (at 400).

Some attention was given by the parties to the judgment of Brennan J. It should immediately observed that his Honour found that neither cl 1(a) nor cl 12 imposed a liability for damages but only accelerated the time for payment of money already due which could not be regarded as penal. However, his Honour found the lessee was entitled to equitable relief against forfeiture in respect of the rental for the period after the lessor recovered possession.

Nonetheless, his Honour’s observations in relation to the question of acceleration are applicable in the present context and are consistent with the then Chief Justice’s observations, in that respect, and supportive of the plaintiff’s position). His Honour observed (at 386):

His Honour recognised that there was a commercial distinction between an entitlement to recover a full amount that a creditor is entitled to immediately as opposed to instalments, as follows (at 387):

His Honour then drew a distinction between cll 1(a) and 12 of the agreement in O’Dea similar to the approach adopted by the then Chief Justice and Wilson J as follows (at 387):

His Honour then approached the question of the resolution of the matter differently to the then Chief Justice and Wilson and Deane JJ in the following passage of his judgment (at 390-391):

Brennan J found that, although the stipulation as to the price payable for the sale of hiring of goods was not itself in the nature of a penalty, a stipulation which provided for the forfeiture on breach by the buyer or hirer of both the price and the consideration for which it is payable is in the nature of a penalty and equity will relieve against it (at 391). In the result, his Honour found that cl 12 was in the nature of a penalty because “the lessor who exacts the full measure of his entitlement under that clause receives more than the damages he would suffer by reason of many of the defaults which enliven that clause” (at 391). I have earlier mentioned the manner in which his Honour disposed of the appeal.

Ultimately, the approach adopted by Brennan J does not support the contentions of the defendant in this matter. His Honour merely approached the question of penalty in a different manner. His Honour found cl 12 was in the nature of a penalty and distinguished, in that respect, the obligation to pay the entire rental and one arising from the default of a lessee which resulted in a right to have both the price of the hiring and the possession of the vehicle which was to be hired in a manner inconsistent with the respective rights of the parties under the agreement if the agreement should be duly performed. In other words, his Honour found, in equity, that the lessor becomes entitled to more than the lessor would be entitled to if no default occurred.

Gibbs CJ in O’Dea referred with approval (at 368) to the judgment of Lord Dunedin in Dunlop Pneumatic Tyre Co at 86-87 wherein his Lordship stated:

It was common ground, again by reference to the judgment of the then Chief Justice in O’Dea (at 368), that the question was “not of words or of forms of speech, but of substance and of things” adopting the words cited by Lord Radcliffe in Campbell Discount Co Ltd v Bridge [1962] AC 600 at 624. As Deane J stated in O’Dea (at 400) in relation to the statement by Lord Dunedin in Dunlop Pneumatic Tyre Co, the question as to whether or not a provision of a contract imposes a penalty must be determined by reference to the true operation of the provision as a matter of substance not foreclosed by statements of the parties in their agreements. That question must be judged at the time of the making of the contract in question.

As to the question of construction of the contract, reference should be made to the judgment of Gleeson CJ in International Air Transport Association v Ansett Australia Holdings Ltd (2008) 234 CLR 151; [2008] HCA 3 at [8] where his Honour stated:

In Johnson v America Home Assurance Co (1998) 192 CLR 266; [1998] HCA 14 at [19], Kirby J (in dissent) stated, “the primary duty of a court is to discern from the language, structure and apparent purpose of the document what it means”.

Commercial contracts should be given a businesslike interpretation. In McCann v Switzerland Insurance Australia Ltd (2000) 203 CLR 579; [2000] HCA 65 at [22], Gaudron J observed: “[i]nterpreting a commercial document requires attention to the language used by the parties, the commercial circumstances which the document addresses, and the objects which it is intended to secure”.

The proper construction of the contract in accordance with those principles, having regard to its terms, the circumstances addressed by the contract and its evident commercial purposes does not sustain the defendant’s contention, in my view, that an immediate debt was incurred upon the execution of the contract, that is, a requirement to make an immediate payment of $18,000, albeit deferred by the making of instalments in accordance with the contract.

There was no express provision in the contract providing that, upon execution, such a debt was owed by the plaintiff. The terms of the contract speak strongly against the finding that an immediate debt emerged upon its execution. The only contractual basis upon which the plaintiff was required to pay the sum of $18,000 or the balance of the instalments was if the contract was breached. It was not argued that the immediate payment of the balance of the instalments on default was a genuine pre-estimate of cost and the terms of cl (c) plainly, by their operation, constitute a penalty. Clause (c) is a penalty provision.

Those conclusions require elaboration.

The first three sections of the contract stand contrary to the construction proposed by the defendant for the following reasons:

The section of the contract entitled “Further Terms” also conflicts with the defendant’s contentions as to the construction of the contract.

I agree with the contention of the plaintiff that the provisions of cl (a) in this section are significant. Clause (a) provides that there shall be no provision for early termination. That notion sits uncomfortably with the contention that the reference to “Total Fee” in the payment schedule section of the contract connotes that a debt of full payment of the amount specified was incurred upon the execution of a contract.

In this respect, I accept the following submissions by the plaintiff (although I would note additionally that, in discussion of the language used in the “third Further Term” in that part of its submissions, the plaintiff omitted to refer to contentions made elsewhere in the plaintiff’s submissions (correctly, in my view) that the word “failure” in the “third Further Term” meant breach):

The defendant submitted that the circumstances of this matter were distinguishable from O’Dea because the plaintiff retained the use of the services that is a truck provided for under the contract, notwithstanding the termination of the contract (or its breach).

I have earlier explained why the defendant’s submissions misunderstood the judgment in O’Dea in that respect and why, when properly understood, the judgment in O’Dea (per Gibbs CJ, Wilson and Deane JJ), as to the finding that the relevant provision of the contract did not, in substance, constitute an acceleration clause operating in the context of an immediate debt but, in the absence of a genuine pre-estimate of loss, a penalty clause and how those considerations are applicable to the contract in this case (see with respect to the judgment of the then Chief Justice, at [56]-[59] of this judgment and the subsequent discussion of similar conclusions reached by Wilson and Deane JJ; see further the earlier discussion of the judgment of Brennan J).The repossession of the truck by the first respondent in O’Dea did not influence that finding, namely, that the relevant clauses constituted a penalty, save to the extent that such a determination depended upon there being no genuine pre-estimate of loss (see at [60]-[66] of this judgment with respect to the judgment of the then Chief Justice and the subsequent discussion of conclusions by Wilson and Deane JJ). Thus, the ratio in O’Dea was apposite to the determination of the present matter. In any event, there are significant difficulties with the premise underpinning the defendant’s contention in this respect vis-à-vis the present matter being distinguishable because of the availability of services to the plaintiff after the termination or breach of the contract for three reasons.

First, and broadly, the plaintiff is correct to submit that, had the plaintiff only purchased a promise to provide for the services provided in the section of the contract entitled “The Service” for a five year period by paying “an upfront payment of $18,000”, it would have had the uncommercial consequence that the plaintiff was exposed to the risk that the services were either not provided or not provided to the quality expected by the plaintiff when signing the contract. As the plaintiff correctly contended, there were no warranties in the contract as to the quality of the services in the contract. Nor was there, in the light of the section of the contract entitled “Further Terms”, any ability for the plaintiff to terminate the contract for services that were not satisfactory.

Secondly, the defendant submitted that the evidence established that upon default of payment by the plaintiff, the defendant continued to provide services under the contract.

I accept the submission of the plaintiff that it is impermissible to examine the post-contract conduct of the defendant in the present context for the purposes of construing the contract: Franklins Pty Ltd v Metcash Trading Ltd (2009) 76 NSWLR 603; [2009] NSWCA 407 at [10]-[13] (per Allsop P), [58] (per Giles JA) and [327] (per Campbell JA).

The plaintiff correctly pointed out that, in any event, the evidence sought to be relied upon by the defendant consisted of three emails of demand for payment, a letter demand from a debt collector, and a letter of demand from the defendant’s solicitor. This evidence cannot be said to be the provision of services under the contract and there is, therefore, no evidence of the provision of services after the termination of the contract.

Thirdly, the submission presupposes that the plaintiff could obtain, in the circumstances alluded to by the defendant, namely, the continuation of services under the contract (in contrast to the repossession of the truck in O’Dea), specific performance of the contract. The defendant was invited by the Court to provide a submission with relevant authorities as to how specific performance might be available in the circumstances of a contract for services of a kind hereunder consideration, having particular regard to the third service condition, namely, a “24 hours a day, 365 days per year telephone advice on all workplace relations matters”.

The defendant contended that there was no longer a strict rule against granting an injunction which had the effect of keeping people in a personal relationship and referred to Curro v Beyond Productions Pty Ltd (1993) 30 NSWLR 337 (“Curro”) at 346-347. It submitted that, whether or not the Court would grant specific performance or an injunction in relation to the contract, did not change how the clause should be constructed because the defendant’s claim was for a debt (a relatively circular argument).

In my view, the defendant’s proposition is unsustainable for the following reasons.

I agree with the plaintiff’s submission that its inability to compel the defendant to perform the promised services is a relevant consideration in construing the contract to give effect to the commercial objectives of the parties (in this case, of course, the matter proceeds upon the basis that the plaintiff is in breach of a contractual term to make instalment payments but this issue arises as a consideration in the construction of the contract).

Further, I accept the plaintiff’s submission that it is most unlikely that equitable remedies would lie to compel performance of the work or services required under the contract in the event of a failure to perform the contract by the defendant (as I have found above the defendant did not perform services under the contract after the last instalment payment by the plaintiff).

It may be accepted (noting the limited submissions received by the Court on this question) that the rule that specific performance will not be granted if the contract involved the performance by one party to the other (such as the enforcement of a contractual obligation for personal service) or requires their continual co-operation (see J C Williamson Ltd v Lukey (1931) 45 CLR 282 at 298 per Dixon J and Geys v Société Genérale [2013] 1 AC 523 at [117]) is not absolute, is attended by exceptions (albeit few: see J D Heydon, M J Leeming and P G Turner, Meagher, Gummow & Lehane’s Equity Doctrines & Remedies (LexisNexis Butterworths, 5th ed, 2015) at [20-055]) and is subject to the exercise of the Court’s discretion, although the operation of the general rule is a matter of very great weight in that respect: Downe v Sydney West Area Health Service (No 2) (2008) 71 NSWLR 633; [2008] NSWSC 159 at [448]-[449]. (In The Principles of Equitable Remedies: Specific Performance, Injunctions, Rectification and Equitable Damages (LawBook Co, 9th ed, 2014) (“The Principles of Equitable Remedies”), I C F Spry observed that the rule that a court of equity will not “as a rule enforce contracts of personal service or any other contract the execution whereof would require continued superintendence by the court” (quoting Starke J: J C Williamson Ltd v Lukey at 292-293) has been gradually resiled from by courts although it would appear less so in the case of contracts for work or labour or hiring and service (at 107).

An example of such an exception was provided by the defendant, namely, the judgment in Curro, and needs to be approached with care.

In that matter, the Court (per Meagher, Handley and Cripps JJA) held that, in the case of appeals from judgment granting, inter alia, an injunction restraining a television presenter and her company from acting in breach of a negative promise in her contract with her television company with the producer of a documentary program.

The trial judge in Curro, had relied upon the doctrine in Lumley v Wagner (1852) 1 De G M & G 604. In this context, the Court dealt, in that respect, with an exception to the rule (stated by Lord Cairns LC in Doherty v Allman (1878) 3 App Cas 709 (“Doherty”) at 720) that a court of equity would always grant an injunction to enforce a negative contractual promise – the exception being that a negative promise would not be enforced by injunction if that would have the practical effect of compelling specific performance of a contract of personal service.

The Court of Appeal in Curro held that the rule could no longer be stated “with such precision” (at 346) and that the “second rule” (the exception to the first rule in Doherty) had been departed from in England per Hill v C A Parsons & Co Ltd [1972] Ch 305 which was followed by the Federal Court in Turner v Australasian Coal and Shale Employees' Federation (1984) 6 FCR 177 at 192-193 and Gregory v Philip Morris Ltd (1988) 80 ALR 455 at 481-482.

The Federal Court cases to which the Court of Appeal referred in this context concern cases, perhaps exceptional in nature, where employees may be able to obtain a decree of specific performance of a contract of employment against the employer wrongfully dismissing the employee. (It should be noted that Hill v C A Parsons & Co Ltd concerned the granting of an injunction and not specific performance). It may be noted that there are English cases in which injunctions were granted to restrain threatened wrongful dismissals, in each case Heydon et al. described the line of cases as “controversial” (see Meagher, Gummow & Lehane’s Equity Doctrines & Remedies at [20-055]). The categories of exceptional circumstances in those employment cases are not closed and involve the aforementioned exercise of discretion.

Some examples of exceptions to the rule against specific performance in the case of contracts of employment include where the effect of maintaining a relationship between parties to a contract of employment may be tempered by the remainder of sufficient trust and confidence between the parties and where there may be no problem of supervision if, for example, the effect of the order is only to require the performance of a specific and definable obligation, such as to submit a dispute about the right to terminate employment to arbitration or to implement a disciplinary procedure (see I Neil and D Chin, The Modern Contract of Employment (Thomson Reuters, 2nd ed, 2017) at 331).

This line of authority often reflects that a Court may more readily depart from the general rule against specific performance in the case of contracts for work or labour by restraining a threatened wrongful dismissal than by restraining an employee abandoning his or her job in breach of a contract because, as the industrial law remedy of reinstatement reflects, the compulsory reinstatement of an employee is more willingly embraced than compulsory servitude: Network Ten Pty Ltd v Seven Network (Operations) Ltd [2014] NSWSC 274 at [13] (per Brereton J).

Similar considerations arise in relation to the defence against a decree of specific performance arising in the case of orders requiring continued supervision. In J C Williamson Ltd v Lukey, Dixon J stated specific performance is inapplicable when the continued supervision the Court is necessary in order to ensure the fulfilment of the contract (at 297-298). The defence will be made out when it is shown that a decree of specific performance would compel the performance, over a period of time, of a number of contractual terms of some detail and complexity, particularly where there is some un-clarity in them: Co-Operative Insurance Society Ltd v Argyll Stores (Holding) Ltd [1998] AC 1 (“Argyll”) at 11-13. However, in the employment context, the High Court commented in Patrick Stevedores Operations No 2 Pty Ltd v Maritime Union of Australia (No 3) (1998) 195 CLR 1; [1998] HCA 30, by reference to Lord Hoffman’s speech in Argyll that the difficulty of supervision was a matter of degree rather than absolute restriction and that that factor “by itself [was] no longer an effective or useful criterion for refusing a decree of specific performance” at [79] (per Brennan CJ, McHugh, Gummow, Kirby and Hayne JJ).

Spry argues that “although indefiniteness or uncertainty may not be such as to prevent the arising of a contract for breach of which damages may be obtained at law, enforcement in specie may in exceptional cases be refused in equity” (The Principles of Equitable Remedies at 109). Whether a particular breach of contract case may fall into such a class is a question of degree which will be affected by factors such as the length of time over which performance may take place, the complexity of the acts or performance that are required, the degree of probability that disputes as to performance may arise and the extent of the difficulty that may arise in establishing whether particular terms have been complied with as well as questions relating to the hardship caused by refusing relief (see The Principles of Equitable Remedies at 110).

This relatively lengthy analysis as to the nature of the rules against decrees of specific performance in the case of contracts for personal service, work or hire and the exceptions to those rules have been undertaken to illustrate the basis upon which the aforementioned conclusion (as part of the construction of the contract) was reached that it is likely that a decree for specific performance would likely, as a matter of discretion, be refused in the present context.

The present matter concerns what may be described as a relational commercial contract (see International Advisor Systems Pty Ltd v XYYX Pty Ltd [2008] NSWSC 2 (“XYYX”) at [49] (per Brereton J). The contract requires the provision of personal services by the defendant to the plaintiff as well illustrated by the third service under the contract, namely, a telephone advice on all workplace relations matters.

The contract is not one of a contract of employment and, therefore, does not fall within one of the aforementioned limited exceptions to a decree of specific performance in relation to contracts of that character. It may be noted, in that respect, that, if the contract were of that character, that is, cases of wrongful dismissal, there would still be significant hurdles to the decree of specific performance. (In De Francesco v Barnum (1890) 45 Ch D 430 at 438, Fry LJ observed “I think the courts are bound to be jealous, lest they should turn contracts of service into contracts of slavery…”).

In Curro, the Court was not considering an order for specific performance of service or service contracts (see at 348). (Spry notes that in many cases where specific performance is not available in the case of a contract for personal services, an injunction prohibiting performance of a particular service may be available (at 56)). The Court did consider the third rule in Doherty by way of “exception to the exception” – in the case of special services a promise not to take employment with a competitor, would, under the doctrine of Lumley v Wagner be restrained. The Court of Appeal refused to accept the contention that the Court would not follow the doctrine in Lumley v Wagner.

However, the Court was careful to set out the limits of the operation of the doctrine and its application in that case. As their Honours observed, Lord St Leonards LC in Lumley v Wagner pointed out that the injunction granted in the case would not compel Madame Wagner to perform her contract with Mr Lumley. Failure to sing for Mr Lumley would not be a breach of the injunction (see at 347 of Curro). She could employ her energies in some other occupation or perhaps return to Germany. The Court observed that the doctrine has been said to apply to contracts for “special services” and referred in that context to opera singers, actresses, football players and newspaper production managers. The injunction in Curro, similar to the injunction in Lumley v Wagner was for a very short period of time and did not represent a case where the choice was between the performance of the service and “destitute idleness” (at 347). Reference was made to Page One Records Ltd v Britton [1968] 1 WLR 157 by way of distinction from the case in Curro because the injunction sought in that case would have compelled the defendants to “re-employ the plaintiff or go out of business” (at 348).

Returning to the circumstances of the present case in the light of the foregoing principles and the further discussion of Curro above, it is possible to examine more closely why an order for specific performance would be most unlikely to follow a breach of contract. A decree of specific performance would compel the performance, over a period of nearly 5 years, of a number of contractual terms of some detail providing for very substantial personal service (24 hours a day, 365 days per year) in relation to intimate issues, namely, workplace relations matters where there is some real lack of clarity as to the nature of the services to be provided by the defendant. There is a high degree of probability that disputes as to performance may arise and there being a difficulty in such cases in deciding whether particular terms have been complied with by the defendant (given the nature of the services). Indeed, one of the issues agitated by the plaintiff was that there was a lack of provision in the contract in the event of an absence of quality in the service provided and any means of rectifying that deficit.

Overall, an order for specific performance would, in my view, be very unlikely to be made (in the exercise of a discretion of the Court upon any default of an obligation such as service by the defendant under the contract) because, for the reasons given above, such an order would require part performance by one party, namely the defendants, in a manner which required their continual cooperation in the performance of personal services under continued supervision of the Court in order to ensure fulfilment of a contract whose nature made it inappropriate for such supervision. Again, this is a matter bearing upon the construction of the contract adversely to the contentions advanced by the defendant.

It is appropriate to address two further aspects of the defendant’s submissions before turning to the penalty nature of cl (c).

First, the defendant placed reliance upon Geeveekay at [74] and [76] (per Bell J). It was submitted that the judgment concerned a contract which required “the buyer to make payments before consideration”. The passage of the judgment relied upon was to the effect that a buyer who failed to make agreed pre-payments could be sued by the seller in debt, once the time for payment had passed, even if consideration had not yet been given. It was submitted the legal character of the buyer’s obligation to make the pre-payment was the present debt to make a future payment that matures into a debt due and payable when the time for the making of payment arises.

As earlier mentioned, the defendant contended the judgment in Geeveekay was analogous to the present case and may be distinguished from a contract for the supply of goods for a price to be paid on delivery which is an executory contract – in which the buyer has paid the price in return for goods, not the seller’s promise to supply the goods. I do not consider that the analogy sought to be drawn, by the defendant, is available in the present context. Geeveekay concerned the question of whether a debt was incurred in the context of the sale of land such as to give rise to the extending of credit and a contravention of the Victorian Consumer Credit Code (“the Code”). In deciding upon the meaning of “incurring a deferred debt” for the purposes of s 4(1) of the Code, the Court observed that the meaning of “incurred” depended upon the particular legislation in which it appears (see Geeveekay at [59]) and concluded that, for the purposes of considering the Code, the same “wide construction” of the phrase “incurs a debt” found in the context of insolvent trading legislation in Hawkins v Bank of China (1992) 26 NSWLR 562 should apply.

More significantly for the present matter, Bell J was concerned only with the question of a debt arising in the context of a contract of sale. The Court noted that, depending upon the terms of the contract, the debt could arise before the delivery of the sale of goods (see Geeveekay at [82]).

Thus, in circumstances where there is a contract for sale under which there is an agreement to pay the purchase price before delivery is taken, it was found that there was a debt at the time the contract was entered into.

The logic of that analysis is that there was a right to the delivery of goods in exchange for the seller obtaining the debt such that the buyer of the goods becomes their owner once the contract is completed. If the seller does not provide the goods, then the buyer can sue for specific performance. Bell J referred to the decision of Salmond J in Ruddenklau v Charlesworth [1925] NZLR 161 with approval (Geeveekay at [114]). At 164-165, Salmond J stated:

This circumstance lays in stark contrast to a contract for services of the kind hereunder considered.

Secondly, the defendant contended that the acceptance of the plaintiff’s submissions would result in the acceleration principle applied in Fermiscan Pty Ltd v James (2009) 261 ALR 408; [2009] NSWCA 355 (“Fermiscan”) at [142] ceasing to have effect or a role in the resolution of construction issues of this kind.

I do not consider this conclusion may be accepted for two reasons:

However, the decision in Fermiscan is applicable to the extent that it identifies what the doctrine of penalties seeks to prevent. Allsop P stated (at [149]):

The final question involved in the construction of the contract was whether, having regard to the foregoing analysis, cl (c) should be found to be a penalty clause. That question, in my view, should, as I have stated, be answered in the affirmative. Some further observations may be made in that context.

The clause provided that, if the plaintiff stopped paying the instalments, and thereby breached the contract, it would face a penalty of paying out the entire balance of unpaid monies being the sum of $18,000 has monies paid. Thus, the balance of the five year contract was payable immediately. The clause operated irrespective of whether the breach was substantial or trivial without distinction in remedy or when the breach occurred in the five year term, that is, at any time during the currency of the agreement without rebate. There was no proper or realistic basis to conclude that the services would be continued after termination (and they were not). It was not (and could not be) suggested the sum payable under the contract by operation of cl (c) was a genuine pre-estimate of losses and damage. The purpose of the clause is plainly to coerce performance of the contract by the plaintiff.

Further, it is inconsistent with any realistic commercial reading of the contract, being a contract for services that, prior to the defendant rendering any of the services provided in the contract, the plaintiff became indebted to the defendant in the sum of $18,000. That burden falls irrespective of the nature of the breach or the inadequacy of the services provided by the defendant. I have earlier dealt adversely to contentions by the defendant as to prepayment of services or services “on demand”. There was nothing in the contract which would permit the plaintiff to later question the value of the services rendered by the defendant and the plaintiff was unable to exit the service.

It follows that from the foregoing considerations that the relevant clause of the contract, namely, cl (c) under the section entitled “Further Terms”, is a penalty clause and that the provision is unenforceable. Pierce LCM was in error in reaching a contrary conclusion in his construction of the contract and making orders in conformity with a finding that the contract gave rise to an immediate debt of $18,000 postponed pursuant to an arrangement for 60 monthly instalments (and a corresponding conclusion as to acceleration).

The appeal in the present matter concerns the construction of a contract. The appeal is of right.

In all the circumstances discussed in this judgment, the appeal must be allowed and the judgments and orders of the Court below of 31 May 2017 should be set aside.

In the summons, the plaintiff also sought verdict and judgment for the plaintiff and the defendant pay the costs of the proceedings including costs of the appeal. No submissions were advanced in that respect, although the plaintiff did not press ground 6 of the summons.

In the ordinary course, this judgment would result in an order that the defendant pay the plaintiff’s costs of the appeal as agreed or, in the absence of agreement, as assessed. The Court proposes to make orders in those terms, subject to any further submissions received by either party on the question of costs.

Directions will be made that the plaintiff bring in short minutes of order reflecting this decision within 14 days of this judgment.

In the event there is a dispute as to the form of orders having regard to the issues discussed in [143] above, the Court will make provision for further submissions in writing in that respect with the issue resolved on the papers (subject to any contrary contention advanced in that respect).

The Court makes the following directions: